Well the Dow Jones closed this morning below 10,000 and for those financial writers who focus more on grabbing reader’s attention rather than on facts, that can only mean one thing: the U.S economy is heading for a double dip recession! Of course the fact that the U.S economy is actually expanding, as are other major economies like China, Japan and Germany, appears irrelevant to many market commentators who seem intent on making investors fear that another economic crisis is at hand.
I am not suggesting that the U.S economy is doing great, quite clearly it isn’t. But to start talking about a double dip recession in the United States is premature. Of course it is possible, but it is also possible that consumer confidence in the U.S will pick up and the U.S economy will return to an extended period of growth.
Clearly markets across the world have not been doing well over the last few weeks. Investors are still a very nervous lot and are more inclined to sell when bad news surfaces rather than to hold or buy on the dips. Every few weeks we hear about some worrying trend regarding the Chinese economy and as usual we are bombarded with the usual stories about deflation in Japan, as though deflation is some sort of disease that sucks the life out of people as they walk to work.
But the unemployment rate in Japan with deflation is currently 5.2%, whereas in good old inflationary United States the unemployment rate is around 9.5%, so I would imagine there are a lot of people in the United States without work that could handle a little deflation in their lives.
As I have discussed before in: Is deflation really such a bad thing? I believe economists and policy makers focus too much on fighting deflation and end up causing much bigger problems when they become obsessed with this battle. In any case I would argue that a little deflation (say 1-2%) is no worse for an economy for a few years than a little inflation. The more policy makers and central bankers try and fight economic cycles the worse they seem to make things.
One minute Gordon Brown was the hero of the European Union (EU) for propping up U.K banks and initiating a massive government spending programme to support the economy, the next minute he is a villain who is voted out of office for getting the U.K. into so much debt. Perhaps a little of deflation in the U.K would have given consumers more buying power, saved the government some money and actually helped the economy?
At the moment many attention seeking commentators and journalists in the financial media are focused on spreading the message that a second global financial crisis is a very real possibility, a double dip recession in the U.S is likely and that the global economy could slip into the abyss.
Remember that a lot of these individuals are the same people who were saying back in 2008 that the capitalist system was about the collapse, that paper money would be basically worthless and the world (not just the U.S) was heading for a depression.
Well the capitalist system continues to function, paper money still works well at the local shops and there has been no global depression.
Sure a lot of western economies don’t look very healthy, but this is hardly going to stop the rise of the Indian, Indonesian and Brazilian economies. It could just be that the major developing economies will actually drag some of the sick major developed economies like the U.S and U.K out of the doldrums.
I am not saying that investors should not be cautious. For example one thing that does worry me is weakness in oil prices and global oil consumption.
According to an article in the Economic Times today:
” Oil inventories in the industrially advanced OECD countries that International Energy Agency (IEA) tracks have also been rising for long. From 92 days of consumption by end 2009, inventories now make up for 96 days of consumption of these countries — a level witnessed only in the first half of 2009.
Globally, crude oil production has consistently remained ahead of consumption for a long time. OPEC, which sets production quotas considering the world’s requirement of crude oil after reducing the non-OPEC production from total demand, has been investing in adding more production capacity and hence has been unable to restrain its member countries in maintaining production levels. “
What this suggests to me is that the demand for oil across developed OECD nations is reflecting the weakness of these economies. However OPEC members nations continue to pump out too much oil and thus we have an oversupply issue, hence oil prices are probably lower than they could and should be.
Lower oil prices however are good for economies like India’s and China’s, so even news about lower oil consumption across the OECD is not all bad.
So before we become too pessimistic about much of the economic data that we believe to be bad, we need to step back and look at the information or figures from another angle. For example maybe lower oil prices is just what the global economy needs right now? Maybe the global financial crisis that has put the brakes on many developed economies is actually giving some developing economies a chance to expand further?
There is no doubt that many of the world’s major economies are struggling to deal with the aftermath of the global financial crisis. But this does not mean that they are about to lurch towards another crisis. A sick patient who is recovering from a major operation doesn’t suddenly start partying again, so we shouldn’t expect the global economy to suddenly put back on it’s dancing shoes.
In my view the global economy is indeed slowly recovering. This doesn’t mean that things will ever be quite the same as before, but on the other hand we shouldn’t talk ourselves into living in a constant state of fear either!